文档介绍：Relevance of Interest Rate Movements
Changes in interest rates impact the real economy
Investment spending
Interest sensitive consumer spending such as housing
Interest rate changes affect the values of all securities
Security prices vary inversely with interest rates
Varying interest rates impact retirement funds and retirement income
Interest rates changes impact the value of financial institutions
Managers of financial institutions closely monitor rates
Interest rate risk is a major risk impacting financial institutions
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Loanable Funds Theory of Interest Rate Determination
Theory of how the general level of interest rates are determined
Explains how economic and other factors influence interest rate changes
Interest rates determined by demand and supply for loanable funds
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Loanable Funds Theory, cont.
Demand = borrowers, issuers of securities, deficit spending unit
Supply = lenders, financial investors, buyers of securities, surplus spending unit
Assume economy divided into sectors
Slope of demand/supply curves related to elasticity or sensitivity of interest rates
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Sectors of the Economy
Household Sector--Usually a net supplier of loanable funds
Business Sector—Usually a net demander in growth periods
Government Sectors
States—Borrow for capital projects
Federal—Borrow for capital projects and deficit spending
Foreign Sectors—Net supplier since early 1980’s
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Demand for Loanable Funds
Sum of sector demand (quantity) at varying levels of interest rates
Sector cash receipts in period less than outlays = borrower
Quantity demanded inversely related to interest rates
Variables other than interest rate changes cause shift in demand curve
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Demand for Loanable Funds
Interest
Rate
Quantity of Loanable Funds
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Loanable Funds Theory
Households demand loanable funds to finance housing, automobiles, household items
These purchases result in installment debt. Installment debt increases